Investments in European securities will become cheaper for local investors

On Monday the Baltic states joined the single European settlement platform TARGET2-Securities, where around half a million transactions are made each day with a total turnover in excess of 700 million euros. Joining the platform will allow Estonian investors to buy and sell European securities more cheaply than before.

On Monday the Nasdaq CSD, which was formed by the merger of the Estonian, Latvian and Lithuanian depositories, and the Spanish depository joined the TARGET2-Securities (T2S) single settlement platform for securities run by the central banks of the euro area. The Spanish and Baltic depositories join 22 other depositories from 20 countries in T2S, which was launched in 2015.

“In one direction, Estonian investors will be enabled by T2S to make transactions more cheaply in future with various European securities, as buying and selling them is currently harder, more time consuming and more expensive. In the other direction, European investors will be able to access Estonian and other Baltic securities more easily”, said Mihkel Nõmmela, head of the Payment and Settlement Systems Department of Eesti Pank.

The main aim of creating T2S is to simplify the settlement of securities across borders, harmonise the rules for settlements and increase competition between depositories. Kristi Sisa, head of the Estonian branch of Nasdaq CSD, said that merging the Estonian, Latvian and Lithuanian depositories as Nasdaq CSD is one of the first signs that the goals of T2S are being met, as the three small depositories would have found it hard to be competitive independently in the changed circumstances. The changes arising from joining T2S will not all occur overnight, but T2S creates the conditions where it will become cheaper for Estonian investors to make transactions with European securities. In essence, a Spanish investor trading with German or Italian securities will no longer be making cross-border securities transactions, as they will be settled under the same conditions as domestic securities transactions.

“As the Baltic depositories are consolidated, so the organisation of supervision will be changed. The depository in Latvia will provide services in Estonia and Lithuania through branches now, so the lead supervisory institution will be the Latvian Financial and Capital Market Commission from now on. The pension register has been separated off from the depository in Estonia, and will remain in Estonia. The pension register registers transactions with units in mandatory and voluntary pension funds”, explained Andre Nõmm, Member of the Board of the Financial Supervision Authority.

T2S is the third single European solution for payments and settlement. The first step concerned large cross-border bank payments in Europe, which could be made in Estonia from 2008. The second step was the Single Euro Payment Area (SEPA), launched in 2014, which allowed retail payments to be made across Europe. From this week the third pan-European settlement platform, T2S, will simplify and speed up the settlement of securities for Estonia.

T2S will make it easier for commercial banks to borrow from Eesti Pank, and from the central bank’s point of view, this will aid financial stability in Estonia. The commercial banks have to provide collateral to the central bank when they borrow from it, and high-quality securities can be used as such collateral. As T2S will give the commercial banks easier access to a much larger securities market, it will make it easier for those banks to provide suitable collateral to the central bank.

Securities accounts and T2S cash accounts are both on a single technical platform in T2S, and this lets account managers at the banks manage their liquidity better.

Background

On 18 September the Baltic and Spanish central banks, the Spanish depository Iberclear, and the Nasdaq CSD, which was formed by the merger of the Estonian, Latvian and Lithuanian depositories, joined T2S. T2S was first launched in 2015, but to reduce the risks arising from the large number of participants and the technical complexity, entry to the platform has been managed in waves. After the last wave, T2S had 22 depositories from 20 countries. T2S is a multi-currency platform and the Danish krona (DKK) will be added to the T2S currencies alongside the euro in 2018. Around half a million transactions are settled each day on the platform with a total turnover in excess of 700 million euros. There are an average of 400-500 transactions a day in the Estonian securities market.